SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ----------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check X whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,839,269 shares
of the Registrant's common stock outstanding as of May 1, 2000.
FIDELITY BANKSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................1
Consolidated Statements of Financial Condition as of
December 31, 1999 and March 31, 2000.................................................2
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 2000..............................................................3
Consolidated Statements of Comprehensive Operations for the three
months ended March 31, 1999 and 2000.................................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000..............................................................5
Notes to unaudited Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................12
PART II.OTHER INFORMATION.................................................................................20
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Unaudited
December 31, March 31,
1999 2000
==================================================
(In Thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions................... $ 41,736 $ 47,729
Interest-bearing deposits........................................... 19,065 26,874
--------------------- -------------------
Total cash and cash equivalents............................... 60,801 74,603
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities................ 29,059 46,967
Mortgage-backed and other securities................................ 336,212 323,594
Corporate debt securities........................................... 38,959 39,310
--------------------- -------------------
Total assets available for sale............................... 404,230 409,871
LOANS RECEIVABLE........................................................... 1,164,421 1,222,459
OFFICE PROPERTIES AND EQUIPMENT, Net ...................................... 44,982 46,975
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market........... 13,354 12,507
REAL ESTATE OWNED, Net..................................................... 775 285
ACCRUED INTEREST RECEIVABLE................................................ 8,330 8,731
DEFERRED INCOME TAX ASSET.................................................. 4,924 4,816
OTHER ASSETS............................................................... 17,116 19,143
--------------------- -------------------
TOTAL ASSETS............................................................... $ 1,718,933 $ 1,799,390
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS................................................................... $ 1,321,510 $ 1,399,534
OTHER BORROWED FUNDS....................................................... 14,656 14,245
ADVANCES FROM FEDERAL HOME LOAN BANK....................................... 247,073 250,144
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.............................. 4,010 7,970
DRAFTS PAYABLE............................................................. 6,533 4,416
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES...................................... 28,750 28,750
OTHER LIABILITIES.......................................................... 13,097 10,297
--------------------- -------------------
TOTAL LIABILITIES................................................... 1,635,629 1,715,356
--------------------- -------------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued.................. -- --
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,834,463 shares outstanding at December 31, 1999, and
6,837,283 shares outstanding at March 31, 2000...................... 683 684
ADDITIONAL PAID-IN CAPITAL................................................. 40,937 41,045
RETAINED EARNINGS - substantially restricted............................... 57,343 59,587
TREASURY STOCK, at cost, 488,806 shares at December 31, 1999 and
493,731 shares at March 31, 2000.................................... (9,232) (9,301)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN.................... (329) (247)
ACCUMULATED OTHER COMPREHENSIVE LOSS....................................... (6,098) (7,734)
--------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY.......................................... 83,304 84,034
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 1,718,933 $ 1,799,390
===================== ===================
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
1999 2000
=================================================
(In Thousands, except share data)
Interest income:
Loans................................................................ $ 18,846 $ 23,102
Investment securities................................................ 321 619
Other investments.................................................... 823 553
Mortgage-backed and other securities................................. 6,064 6,202
---------------------- ---------------------
Total interest income.......................................... 26,054 30,476
---------------------- ---------------------
Interest expense:
Deposits............................................................. 12,267 14,724
Advances from Federal Home Loan Bank and other borrowings............ 5,159 4,365
---------------------- ---------------------
Total interest expense......................................... 17,426 19,089
---------------------- ---------------------
Net interest income........................................................ 8,628 11,387
Provision for loan losses.................................................. 34 201
---------------------- ---------------------
Net interest income after provision for loan losses........................ 8,594 11,186
---------------------- ---------------------
Other income:
Service charges on deposit accounts.................................. 715 845
Fees for other banking services...................................... 523 614
Net gain on sale of loans, investments
and mortgage-backed securities................................. 206 -
Miscellaneous........................................................ 367 2,853
---------------------- ---------------------
Total other income............................................. 1,811 4,312
---------------------- ---------------------
Operating expense:
Employee compensation and benefits................................... 4,741 6,320
Occupancy and equipment.............................................. 1,805 2,214
Gain on real estate owned............................................ (100) (50)
Marketing............................................................ 257 249
Federal deposit insurance premium.................................... 159 68
Other................................................................ 1,556 1,880
---------------------- ---------------------
Total operating expense........................................ 8,418 10,681
---------------------- ---------------------
Income before provision for income taxes................................... 1,987 4,817
---------------------- ---------------------
Provision for income taxes:
Current.............................................................. 690 737
Deferred............................................................. 80 1,105
---------------------- ---------------------
Total provision for income taxes............................... 770 1,842
---------------------- ---------------------
Net income................................................................. $ 1,217 $ 2,975
====================== =====================
Earnings per share:
Basic................................................................ $ 0.19 $ 0.46
====================== =====================
Diluted.............................................................. $ 0.19 $ 0.46
====================== =====================
See Notes to Unaudited Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the
Three Months Ended
March 31,
1999 2000
=========================================
(In Thousands)
Net income................................................................. $ 1,217 $ 2,975
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period......... 208 (1,636)
------------------ ------------------
Comprehensive income....................................................... $ 1,425 $ 1,339
================== ==================
See Notes to Unaudited Consolidated Financial Statements.
4
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
1999 2000
===================================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income..................................................................................... $ 1,217 $ 2,975
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization........................................................ 600 694
ESOP and Recognition and Retention Plan compensation expense......................... 137 104
Accretion of discounts, amortization of premiums, and other deferred yield items..... 614 (103)
Provision for loan losses and real estate losses..................................... 34 201.
Provisions for (gains) losses and net (gains) losses on sales of real estate owned... (80) (88)
Gain on securities received from insurance carrier's demutualization................. - (2,416)
Net (gain) loss on sale of:
Loans......................................................................... (206) -
Decrease (increase) in accrued interest receivable............................................. 42 (401)
Decrease in other assets....................................................................... 216 487
Decrease in drafts payable..................................................................... (1,637) (2,117)
Decrease in deferred income tax asset.......................................................... 190 1,110
Decrease in other liabilities.................................................................. (1,716) (2,799)
-----------------------------------
Net cash used for operating activities........................................ (589) (2,353)
-----------------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans.............................................. (38,027) (50,926)
Principal payments received on mortgage-backed securities...................................... 31,478 9,421.
Purchases of:
Loans................................................................................ (9,296) (7,000)
Mortgage-backed and other securities................................................. (10,044) -
Federal Home Loan Bank stock......................................................... - (653)
Municipal bonds and government and agency securities................................. (22,670) (20,115)
Office properties and equipment...................................................... (1,658) (2,705)
Proceeds from sales of:
Loans................................................................................ 11,673 -
Federal Home Loan Bank stock......................................................... 98 1,500
Real estate acquired in settlement of loans.......................................... 845 435
Proceeds from maturities of municipal bonds and government and agency securities............... 2,000 2,000
Other.......................................................................................... 117 259
-----------------------------------
Net cash used for investing activities........................................ (35,484) (67,784)
-----------------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock................................................... 13 26
Purchase of Treasury Stock..................................................................... (1,915) -
Cash dividends................................................................................. (730) (731)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts.................................. 32,655 69,226
Certificates of deposit.............................................................. 8,468 8,798
Advances from Federal Home Loan Bank................................................. (1,929) 3,071
Other borrowed funds................................................................. 1,124 (411)
Advances by borrowers for taxes and insurance........................................ 4,075 3,960
-----------------------------------
Net cash from financing activities............................................ 41,761 83,939
-----------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................................................... 5,688 13,802
CASH AND CASH EQUIVALENTS, Beginning of period................................................. 60,026 60,801
-----------------------------------
CASH AND CASH EQUIVALENTS, End of period....................................................... $ 65,714 $ 74,603
===================================
See Notes to Unaudited Consolidated Financial Statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Bank & Trust (the "Bank") conform
to generally accepted accounting principles and to predominant practices within
the thrift industry. The Company has not changed its accounting and reporting
policies from those disclosed in its 1999 Annual Report on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at March 31, 2000 and
the results of its consolidated operations and cash flows for the period then
ended, all of which are of a normal and recurring nature, have been included.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000 and, accordingly, would apply to the
Company beginning on January 1, 2001. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 2000 presentation.
6
2. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and March 31, 2000, consist of the
following:
December 31, March 31,
1999 2000
=======================================================
(In Thousands)
One-to-four single family, residential real estate
mortgages................................................... $ 925,384 $ 949,074
Commercial real estate mortgages...................................... 118,262 127,208
Real estate construction-primarily residential........................ 63,589 73,032
Land loans-primarily residential...................................... 9,763 13,643
------------------------ ------------------------
Total first mortgage loans.................................. 1,116,998 1,162,957
Consumer loans........................................................ 60,281 65,263
Commercial business loans............................................. 94,157 105,229
------------------------ ------------------------
Total gross loans........................................... 1,271,436 1,333,449
Less:
Undisbursed portion of loans in process..................... 106,232 110,043
Unearned discounts, premiums and deferred loan
fees, net............................................ (2,826) (2,818)
Allowance for loan losses................................... 3,609 3,765
------------------------ ------------------------
Loans receivable-net.................................................. $ 1,164,421 $ 1,222,459
======================== ========================
7
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1999 and the three months ended March 31, 1999 and 2000, is as
follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
1999 1999 2000
==========================================================
(In Thousands)
Balance at beginning of period............................ $ 3,226 $ 3,226 $ 3,609
Current provision......................................... 463 34 201
Charge-offs (recoveries)-net.............................. (80) (59) (45)
--------------- ---------------------------------
Ending balance............................................ $ 3,609 $ 3,201 $ 3,765
=============== =================================
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
March 31, 1999 March 31, 2000
==============================================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------------------------------------------------------------------------
(In Thousands)
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms........................ $ 305 $ 145 $ 335 $ 235
Loans for which interest income is
not being recognized..................... 3,534 - 3,107 -
------------------------------------- -----------------------------------
Total............................... $ 3,839 $ 145 $ 3,442 $ 235
===================================== ===================================
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
8
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Bank & Trust, is a regulated
financial institution. Its regulatory capital amounts and ratios are presented
in the following table:
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
---------------------------------------------------------------------
(Dollars In Thousands)
As of December 31, 1999 Stockholders' Equity
and ratio to total assets........................... 6.5% $ 110,972
==========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)....................................... 6,098
Goodwill.................................................. (2,758)
Disallowed servicing assets and deferred tax assets....... (52)
----------
Tangible capital and ratio to adjusted total assets....... 6.6% $ 114,260 1.5% $ 25,867
========== ========== ======= ==========
Tier 1 (core) capital and ratio to adjusted
total assets........................................ 6.6% $ 114,260 3.0% $ 51,734 5.0% $ 86,224
========== ========== ======= ========== ========= =========
Tier 1 (core) capital and ratio to risk-weighted
total assets........................................ 11.9% $ 114,260 4.0% $ 38,397 6.0% $ 57,595
========== ======= ========== ========= =========
Allowable Tier 2 capital:
General loan valuation allowances................... 2,797
Equity investments.................................. -
----------
Total risk-based capital and ratio to risk-weighted
total assets................................... 12.2% $ 117,057 8.0% $ 76,794 10.0% $ 95,992
========== ========== ======= ========== ========= =========
Total assets.............................................. $1,717,452
==========
Adjusted total assets..................................... $1,724,478
==========
Risk-weighted assets...................................... $ 959,923
==========
As of March 31, 2000 Stockholders' Equity
and ratio to total assets........................... 6.2% $ 111,763
==========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)....................................... 7,734
Goodwill.................................................. (2,694)
Disallowed servicing assets and deferred tax assets....... (48)
----------
Tangible capital and ratio to adjusted total assets....... 6.5% $ 116,755 1.5% $ 26,969
========== ========== ======= ==========
Tier 1 (core) capital and ratio to adjusted
total assets........................................ 6.5% $ 116,755 3.0% $ 54,230 5.0% $ 90,384
========== ========== ======= ========== ========= =========
Tier 1 (core) capital and ratio to risk-weighted
total assets........................................ 13.3% $ 116,755 4.0% $ 35,234 6.0% $ 52,852
========== ======= ========== ========= =========
Allowable Tier 2 capital:
General loan valuation allowances................... 3,061
Equity investments.................................. -
----------
Total risk-based capital and ratio to risk-weighted
total assets................................... 13.6% $ 119,816 8.0% $ 70,469 10.0% $ 88,086
========== ========== ======= ========== ========= =========
Total assets.............................................. $1,797,939
==========
Adjusted total assets..................................... $1,807,671
==========
Risk-weighted assets...................................... $ 880,862
==========
9
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended March
31, 1999 and 2000, are as follows:
For the Three Months Ended
March 31, 1999
----------------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
======================================================================
Net income......................................... $ 1,217,000
========================
Basic EPS:
Income available to
common stockholders........................... $ 1,217,000 6,429,864 $ 0.19
======================== =================
Effect of diluted shares:
Common stock options.......................... 79,437
--------------------
Diluted EPS:
Income available to
common stockholders........................... $ 1,217,000 6,509,301 $ 0.19
======================== ==================== ==================
For the Three Months Ended
March 31, 2000
---------------------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
===============================================================
Net income......................................... $ 2,975,000
===================
Basic EPS:
Income available to
common stockholders........................... $ 2,975,000 6,465,460 $ 0.46
=================== ===============
Effect of diluted shares:
Common stock options.......................... 43,374
--------------------
Diluted EPS:
Income available to
common stockholders........................... $ 2,975,000 6,508,834 $ 0.46
=================== ==================== ===============
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Income (Loss) for
the periods ended March 31, 1999 and 2000, is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 1999 March 31, 2000
---------------------------- ----------------------------
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on Securities on Securities
==================================================================
(In Thousands)
Beginning balance.................................. $ (318) $ (6,098)
Current-period change.............................. 208 (1,636)
------------ ------------
Ending balance..................................... $ (110) $ (7,734)
============ ============
An analysis of the related tax effects allocated to Other Comprehensive Income
(Loss) is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 1999 March 31, 2000
------------------------------------ ------------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
==========================================================================
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period................................ $ 335 $ (127) $ 208 $(2,639) $ 1,003 $(1,636)
==================================== ====================================
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank. Consequently, its net
income is derived from the Bank. The Bank's net income is primarily dependent on
its net interest income, which is the difference between interest income earned
on its investments in mortgage loans and mortgage-backed securities, other
investment securities and loans, and its cost of funds consisting of interest
paid on deposits and borrowings. The Bank's net income also is affected by its
provision for loan losses, as well as by the amount of other income, including
income from fees and service charges, net gains and losses on sales of
investments, and operating expense such as employee compensation and benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Bank. In particular, the general level of market
interest rates tends to be highly cyclical.
Forward-Looking Statements.
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, uncertainties
related to year 2000 that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
Recent Developments.
As previously reported, one of Palm Beach County's largest employers, Pratt &
Whitney, has announced that it will be substantially closing its operations in
Florida by September 2000. Of the estimated four thousand employees affected,
approximately two thirds reside in Palm Beach County, while the remainder live
in Martin County. Both counties are within the Bank's primary service area.
Management is unable to estimate the effects on the Bank's operation, if any, as
a result of Pratt & Whitney's plant closing.
On January 27, 2000, the Office of Thrift Supervision approved the Bank's
application to exercise personal and employee benefit trust powers. As a result
of this approval and in recognition of the Bank's expanding product lines, the
Company's wholly-owned subsidiary changed its name on March 1, 2000, to Fidelity
Federal Bank & Trust.
Other Comprehensive Income/Loss.
Accumulated Other Comprehensive Loss for the quarter ended March 31, 2000
increased by $1.6 million to $7.7 million. This increase was due to a decrease
in the market value of Assets Available for Sale which resulted from an increase
in market interest rates for these instruments. Accumulated Other Comprehensive
Loss for the quarter ended March 31, 1999 decreased by $208,000, due to an
increase in the market value of Assets Available for Sale which resulted from a
modest decrease in market interest rates for these instruments.
13
Results of Operations.
Net income for the quarter ended March 31, 2000 was $3.0 million, representing
an increase of $1.8 million compared to $1.2 million for the same period in
1999. The primary reasons for this increase, as more fully described later
herein, was an increase in net interest income of $2.8 million and an increase
in other income of $2.5 million. Partially offsetting these factors was an
increase in operating expenses of $2.3 million and an increase in the provision
for income taxes of $1.1 million.
Interest Income.
Interest income for the quarter ended March 31, 2000, totaled $30.5 million,
representing an increase of $4.4 million or 17.0% compared to the same 1999
quarter. The primary reason for this increase was an increase in the Bank's
interest income from loans of $4.3 million. This increase was primarily the
result of an increase of 19.9% in the average balance of loans to $1.2 billion
from $995.5 million for the period ended March 31, 2000 and 1999, respectively.
Interest income from investment securities increased to $619,000 for the quarter
ended March 31, 2000 from $321,000 for the 1999 quarter. This increase was due
to an increase in the average balance of investment securities of $12.2 million
and an increase in the average rate of such securities to 6.63% in 2000 from
5.10% in 1999. The Bank's interest income from mortgage-backed securities also
increased by $138,000. This increase resulted from an increase in the average
rate of mortgage-backed securities to 6.74% from 5.71% for the quarters ended
March 31, 2000 and 1999, respectively. Partially offsetting these increases was
a decrease in interest income from other investments of $270,000, which resulted
from a decrease in the average balance on these investments to $34.0 million
from $56.5 million for the quarters ended March 31, 2000 and 1999, respectively.
Interest Expense.
Interest expense for the quarter ended March 31, 2000, totaled $19.1 million, an
increase of $1.7 million or 9.5% from the same quarter in 1999. The principal
cause for this increase was an increase in interest expense on deposits of $2.5
million. This resulted from an increase in the average balance of deposits to
$1.4 billion for the quarter ended March 31, 2000 compared to $1.1 billion for
the same quarter in 1999. This increase was partially offset by a decrease in
interest expense on borrowed funds of $794,000 caused primarily by a decrease in
the average balance of such funds to $286.1 million from $338.4 million for the
quarters ended March 31, 2000 and 1999, respectively.
Net Interest Income.
While the Bank's interest income increased by $4.4 million for the quarter ended
March 31, 2000, compared to the same quarter in 1999, interest expense also
increased by $1.7 million, resulting in net interest income of $11.4 million for
the quarter ended March 31, 2000. This represents a $2.8 million or 32.0%
increase in net interest income when compared to the same period in 1999.
Provision for Loan Losses.
The Bank's provision for loan losses increased by $167,000 to $201,000 for the
quarter ended March 31, 2000 from $34,000 for the quarter ended March 31, 1999,
principally as the result of increased originations of commercial real estate
mortgages, consumer loans and commercial business loans. The Bank's total
allowance for loan losses at March 31, 2000 of $3.8 million was deemed adequate
by management, in light of the risks inherent in the Bank's loan portfolio. The
Bank's ratio of non-performing loans to total loans was .20% and .29% at March
31, 2000 and 1999, respectively.
14
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances for loan
losses are based on management's estimate of the fair value of collateral, as
applicable, and the Bank's actual loss experience and standards applied by the
OTS and FDIC. The Bank provides both general valuation allowances (for
unspecified, potential losses) and specific valuation allowances (for known
losses) in its loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
capital. The Bank regularly reviews its loan portfolio, including impaired
loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. Since the Bank is increasing
its production of commercial business loans and since such loans are deemed to
have more credit risk than mortgage loans, the Bank's provision for loan losses
is likely to increase in future periods.
Other Income.
Other income for the quarter ended March 31, 2000 was $4.3 million or $2.5
million more than the same quarter in 1999. This increase is due primarily to an
increase of $2.5 million in other miscellaneous income, which resulted from the
receipt of 142,133 shares of John Hancock Financial common stock, received
pursuant to John Hancock's conversion from a mutual to a stock insurance
company. The Bank received these shares as a result of owning various life
insurance policies issued by John Hancock Financial. The shares will be
classified as "Available for Sale" until sold. Also attributing to this increase
in other income was an increase in service charges on deposit accounts to
$845,000 from $715,000 and an increase in fees for other banking services to
$614,000 from $523,000 for the quarters ended March 31, 2000 and 1999,
respectively. These increases were slightly offset by a decrease in net gain on
sale of loans, investments and mortgage-backed securities of $206,000 for the
quarter ended March 31, 2000 compared to the same 1999 quarter.
Operating Expense.
Operating expenses were $10.7 million, representing a $2.3 million increase for
the quarter ended March 31, 2000 when compared to $8.4 million for the quarter
ended March 31, 1999. Employee compensation and benefits increased by $1.6
million. This increase, which includes normal salary increases, is due mainly to
the hiring of additional personnel in connection with the Bank's continued
branch expansion in 2000 as well as expansion of the Bank's commercial loan
production capabilities. As a result, the Bank's full time equivalent personnel
increased by 126 at March 31, 2000 to 547 compared to 421 at March 31, 1999.
Occupancy and equipment costs increased by $409,000 due in part to increases in
real estate tax assessments on the Bank's properties along with additional
depreciation expenses relating to new computer equipment and new branch office
facilities opened during 1999 and 2000. In addition, there was an increase in
other operating expense of $324,000 and a decrease in gain on real estate owned
of $50,000 for the quarters ended March 31, 2000 and 1999, respectively. These
increases were only slightly offset by a decrease in marketing costs of $8,000
and a decrease in federal deposit insurance premiums of $91,000 for the quarter
ended March 31, 2000 compared to 1999.
Income Taxes.
Provision for incomes taxes was $1.8 million for the quarter ended March 31,
2000 compared to $770,000 for the quarter ended March 31, 1999. This increase
was attributable to a increase in income before provision for income taxes of
$2.8 million to $4.8 million in 2000 from $2.0 million in 1999. These expenses
approximate the rates paid by the Company for Federal and State income taxes
applied to the Company's pre-tax income.
15
Changes in Financial Condition.
The Company's assets increased by $80.5 million from December 31, 1999 to March
31, 2000. Net loans receivable increased by $58.0 million, while cash and
investments increased by $19.4 million. In addition, the Bank increased its
investment in office properties and equipment, primarily for new office sites,
by $2.0 million, while all other assets increased by $1.0 million. Funds for the
increase in assets were provided primarily by an increase in the Bank's deposits
of $78.0 million and an increase in advances from the FHLB of $3.1 million. The
Company's equity at March 31, 2000 increased by $730,000 from December 31, 1999.
This increase consisted of net income for the quarter of $3.0 million which was
offset by dividends declared of $731,000 and also an increase in Accumulated
Other Comprehensive Loss of $1.6 million.
Market Risk Analysis.
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity. Since the majority of the Company's
interest-bearing liabilities and nearly all of the Company's interest-earning
assets are held by the Bank, virtually all of the Company's interest rate risk
exposure lies at the Bank level. As a result, all significant interest rate risk
management procedures are performed by management of the Bank. Based upon the
nature of the Bank's operations, the Bank is not subject to foreign currency
exchange or commodity price risk. The Bank's loan portfolio is concentrated
primarily in Palm Beach, Martin and Broward Counties in Florida and is therefore
subject to risks associated with the local economy. As of March 31, 2000, the
Company does not own any trading assets, other than $1.1 million of assets held
by the SMPIAP Trust which can be actively traded by and are held for the benefit
of senior management. Income in these accounts accrues to and losses are solely
absorbed by senior management. At March 31, 2000, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The majority of the Company's assets and liabilities are monetary in nature
which subjects the Company to significant interest rate risk. As stated above,
the majority of the Company's interest-bearing liabilities and nearly all of the
Company's interest-earning assets are held by the Bank and therefore virtually
all of the Company's interest rate risk exposure lies at the Bank level.
The Bank monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity ("MVPE"). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discount rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations of
MVPE as of March 31, 2000.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
------------------------- -------------------------------------
+200bp 197,254 (47,780) -19.5%
+100bp 225,802 (19,232) -7.8%
-0- 245,034 - -
-100bp 256,413 11,379 4.6%
-200bp 254,383 9,349 3.8%
16
In preparing the MVPE table above, the Bank has estimated prepayment rates for
its loans ranging from 8% to 22% depending on interest rate scenario. These
rates are management's best estimate based on prior repayment experience.
Decay rates for liabilities indicate an assumed annual rate at which an
interest-bearing liability will be withdrawn in favor of an account with a more
favorable interest rate. Decay rates have been assumed for demand deposits, NOW
accounts, passbook and money market deposits. During 1999, the Bank contracted
with a third party consultant to perform an analysis of its core deposit
accounts. The purpose of this analysis was to obtain an estimate of the actual
deposit balance trends over various interest rate scenarios in the Bank's
previous five years and to use that data to provide a forecast of future balance
trends over various interest rate scenarios. The following decay rates are based
on this analysis.
6 Months 1 Year 3 Years 5 Years
Through Through Through Through Over 10
0-6 Months 1 Year 3 Years 5 Years 10 Years Years
----------------------------------------------------------------------------
NOW accounts .27% .27% 1.54% 1.51% 3.75% 100.00%
Passbook, club accounts .00% .00% .03% .92% 10.63% 100.00%
Money market deposit accounts 6.49% 6.49% 29.49% 36.16% 100.00% 100.00%
The above assumptions are estimates of annual percentages based on remaining
balances and while management believes these rates to be a reasonable analysis
of future deposit trends based on past performance, they should not be regarded
as indicative of the actual prepayments and withdrawals that may be experienced
by the Bank in any given period. Certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in MVPE requires the making of certain assumptions that may or may not reflect
how actual yields and costs respond to changes in market rates. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the assets.
Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels may possibly deviate significantly from those assumed in
calculating the above table. Management has also made estimates of fair value
discount rates that it believes to be reasonable. However, due to the fact that
there is no quoted market for many of the assets and liabilities, management has
no definitive basis to determine whether the fair values presented would be
indicative of the value negotiated in an actual sale.
Accordingly, while the above table provides an estimate of the Bank's interest
rate risk exposure at a particular point in time, it is not intended to provide
a precise forecast of the effect of market changes on the Bank's MVPE and net
interest income, as actual results may vary.
Under OTS risk-based capital regulations, savings associations are required to
calculate the MVPE. These calculations are based upon data concerning
interest-earning assets, interest-bearing liabilities and other rate sensitive
assets and liabilities provided to the OTS on schedule CMR of the quarterly
Thrift Financial Report. Commencing March 31, 1994, for purposes of measuring
interest rate risk, the OTS began using the MVPE calculations which essentially
discount the cash flows from an institution's assets and liabilities to present
value, using current market rates. There are significant differences between the
Bank's internal assumptions used to calculate the previously presented MVPE and
those used by the OTS. For example, the Bank's internal decay rates for NOW,
passbook and money market accounts produce an average expected life for these
instruments of 17.93 years, 12.44 years and 4.15 years, respectively. The OTS
standard assumptions for these same instruments at December 31, 1999 result in
an expected average life of 2.8 years, 3.4 years and 1.4 years, respectively.
Accordingly, the Bank's previously presented MVPE calculations are not
representative of those which would be produced by the OTS.
17
The amendments to the risk-based capital regulations require institutions to
hold additional risk-based capital in an amount equal to one-half the amount an
institution's interest rate risk when it exceeds the normal amount of interest
rate risk. Normal interest rate risk is defined as 2% of the MVPE at static
interest rates. If, after applying a rate shock of 200 basis points ("bp") (one
basis point equals .01%) of either a decline or increase in rates, the resultant
negative change in MVPE exceeds 2% of MVPE at static interest rates, an
institution is deemed to have excess interest rate risk. At March 31, 2000, the
Bank was not required to hold additional risk-based capital for interest rate
risk-purposes.
The Bank's policy in recent years has been to reduce its exposure to interest
rate risk generally by better matching the maturities of its interest rate
sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in a low interest rate environment, borrowers
typically prefer fixed rate loans to ARM loans. The Bank seeks to lengthen the
maturities of its deposits by promoting longer-term certificates. The Bank does
not solicit high-rate jumbo certificates or brokered funds.
Liquidity and Capital Resources.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio currently is 4.0%. The Bank's
liquidity ratio averaged 22.59% during the month of March 2000. Liquidity ratios
averaged 23.07% for the quarter ended March 31, 2000. The Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows, payment of
real estate taxes on mortgage loans, and repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $26.9 million at
March 31, 2000. Other assets qualifying for liquidity at March 31, 2000,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
were $329.6 million. For additional information about cash flows from the
Company's operating, financing and investing activities, see Consolidated
Statements of Cash Flows included in the Financial Statements. A major portion
of the Bank's liquidity consists of cash and cash equivalents, which are a
product of its operating, investing and financing activities. The primary
sources of cash are net income, principal repayments on loans and
mortgage-backed securities, increases in deposit accounts and advances from the
FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At March 31, 2000, the Bank had $250.1 million in advances from
the FHLB. At March 31, 2000, the Bank had commitments outstanding to originate
or purchase loans of $84.1 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at March 31, 2000, totaled $704.5 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
18
FASB Statement on Derivatives and Hedging Activities - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after July 1, 2000 and, accordingly, would apply to the Company beginning on
January 1, 2001. The Company plans to adopt the standard at that time and does
not presently intend to reclassify securities between categories. The Company
has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
19
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than
legal proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 5), Notes
to Unaudited Consolidated Financial Statements (pages 6
through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12
through 19), and are incorporated by reference, herein.
Exhibit 27 Financial Data Schedule
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: May 10, 2000 By: /s/ Vince A. Elhilow
---------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 10, 2000 By: /s/ Richard D. Aldred
----------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
21